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spk04: Greetings and welcome to CVScientist's third quarter 2021 conference call. At this time, all participants are in a listen-only mode and this conference is being recorded. Following the formal presentation, management will take questions from the analyst community. I would now like to turn the call over to CVScientist for an introduction. Please go ahead.
spk00: Thank you and good morning, everyone. With us today with prepared remarks are CVSciences Chief Executive Officer Joseph Dowling and Chief Financial Officer Jorg Grasser. I would like to remind you that during this call, management's prepared remarks may contain forward-looking statements, and management may make additional forward-looking statements during the Q&A session. These forward-looking statements are subject to risk and uncertainties that may cause actual results to differ materially from those anticipated by CVSciences at this time. When used in this call, The words anticipate, could, estimate, intend, expect, believe, potential, will, should, project, and similar expressions as they relate to CV Sciences are as such forward-looking statements. Finally, please note that on today's call, management will refer to non-GAAP financial measures in which CV Sciences excludes certain expenses from its GAAP financial results. Please refer to CV Sciences' press release from earlier today for a full reconciliation of its non-GAAP performance measures to the most comparable GAAP financial measures. This morning, November 15th, the company issued a press release announcing its financial results. Participants on this call who may not have already done so may wish to look at the press release as the company provides a summary of the results on this call. The press release may be found at cvsciences.com. Following the prepared remarks, we will open up for Q&A from the analyst community. I would now like to turn the call over to CVSciences Chief Executive Officer, Mr. Joseph Dowling. Joe?
spk03: Thank you, Melissa. Good morning, and thank you for joining us for today's conference call. Third quarter results were largely in line with our expectations. Revenue of $5.1 million was down from $5.6 million a year ago, but flat on a sequential basis as we continued to experience trends gradually recovering in key retail channels. We also delivered another solid improvement in gross margin, which was up 200 basis points versus last year. Adjusted EBITDA loss in the third quarter was 2.7 million, down fractionally compared to the third quarter of 2020. The most exciting news from the third quarter is that we are finally starting to see some positive momentum on the regulatory front. The passage of AB 45 in California is highly encouraging, and we are optimistic that it will serve as a model for responsible CBD legislation in other states and eventually lead to federal legislation and regulatory framework. The new California legislation, AB 45, explicitly permits the retail sale of products containing hemp-derived extracts and cannabinoids such as CBD. Prior to this legislation, we have not been able to sell ingestible products to California brick and mortar retailers, including natural product retailers, specialty retailers, and FDM retailers. With the enactment of AB 45, It completely mitigates the severe risk of non-compliance for retailers in California and opens the biggest opportunity in the U.S. from a single state perspective. AB 45 will provide Californians with access to the health and wellness benefits of our safe and effective hemp derived CBD products. We look forward to working with our retail partners to rapidly expand our distribution footprint in California. California is not the only state where we see regulatory progress. During the third quarter alone, we saw new legislation pass or interim guidelines established in several other states, including Alaska, Hawaii, Louisiana, Maine, Michigan, and Nevada. This is great momentum and we believe will lead to other states following along, joining the inevitable nationwide acceptance of hemp derived products at the state level. This momentum will eventually lead to federal legislation and a much needed regulatory framework. The impact of no federal regulatory framework is clear. from data recently published by the Brightfield Group, where the 2021 market, which is estimated by Brightfield at $4.7 billion in revenue in the U.S., is flat when compared with total 2020 revenue. As we stated during our Q1 2021 call, we expected 2021 to be a repositioning year, and that is what is happening. The future CBD market, according to Brightfield and others, is very promising. According to Brightfield, the total addressable market in 2022 is estimated at $5.8 billion, a forecasted 22% increase over 2021. The repositioning of our industry will significantly contribute to future 20% plus growth rates as estimated by Brightfield and others. This repositioning has several elements and some of our thoughts include the following. First, I just spoke about regulatory momentum at the state level. Regulatory certainty is probably the biggest catalyst for our industry and there is momentum at the state level and eventually the feds will come along. Second, the latest data indicates that at its peak, the CBD market was home to roughly 3,500 brands. The most recent estimate is that this number has dropped to nearly 2,000 brands. Still too many, but this is good progress. And third, our industry is still hugely fragmented. Market analysts estimate that only 19% of total CBD sales come from the top 20 CBD companies, which indicates that a significant amount of the total addressable market is still up for grabs. So with further brand contraction and consolidation, We believe the Brightfield addressable market of $5.8 billion in 2022 is achievable and represents growth opportunities for the top companies in our industry, including CV Sciences. Given the current market dynamics, our areas of focus include, first, being as cost efficient as possible and achieving cash flow breakeven in the near term. Second, continue to work on brand awareness, establishing much-needed consumer credibility where quality, safety, and product value is clear and still doing this effectively in a crowded, fragmented space with 2,000 brands all fighting for mindshare. And third, continue to innovate with new products that meet changing consumer demographics preferences and need states. Recent examples of our product innovation include our PlusCBD Calm and Sleep Gummies, specifically addressing critical need states for our customers. During Q3, these two products, along with our Cherry Mango Gummies, received the top three awards from the LA Weekly publication. Early feedback from consumers and retailers is very strong for both our calm and sleep gummies. And most recently, we launched our new PlusCBD Reserve Collection, a full-spectrum product that is intended to provide the benefit of hemp cannabinoids, including CBD and THC, working synergistically for a balanced cannabinoid supplement. Like all of our products, the Reserve Collection is made with the highest quality ingredients from selected batches of hemp extract with a cannabinoid-rich profile that meets the definition of hemp to achieve the PlusCBD Reserve Collection's unique cannabinoid profile. Early feedback from consumers and retailers from our Reserve Collection is very strong. New product innovation is critical to growing our company. In Q3, 40% of our revenue came from products developed in the prior 12 months. Innovation is critical. Consumer demands and needs are changing quickly. Having the right products is essential. Product innovation is a huge focus for us. and we expect to continuously develop and launch new products as the market begins a new growth phase. On our drug development program, we are confident that we have good proof of concept data, good preclinical data, and strong IP protection. Our current focus is completing the manufacturing component in support of clinical trials. We continue to believe that treatment for smokeless tobacco addiction represents a huge unmet market need estimated at over $2 billion. We continue to believe that CBD has a significant role in both consumer and pharmaceutical products. Along with our nicotine cessation program, we are pursuing additional medical indications and compounds for possible drug development with active intellectual property and proof of concept efforts in progress. As we have previously mentioned, we expect to partner our drug programs sometime in the future. In summary, the CBD market has been tough but is changing quickly and we are optimistic about recent developments around regulatory momentum, industry contraction and consolidation, and our own ability to innovate and operate efficiently. Our development pipeline includes many exciting products that we expect to introduce over the next several quarters as we continue leveraging our proprietary know-how. Now, let me turn it over to Jorg to run through our financials.
spk01: Thank you, Joe, and good early morning, everyone. Our third quarter revenue was $5.1 million versus $5.6 million in the third quarter of 2020 and flat sequentially compared to the second quarter of 2021. The year-over-year decline is largely due to lower sales to independent natural product retailers as well as increased market competition reflecting the lack of a clear regulatory framework. Our retail store count was more than 7,700 stores as of September 30th, 2021, up approximately 24% versus a year ago with the FDM channel where we had 4,900 stores continuing to account for the majority of the increase. E-commerce revenue was slightly down and has been trending just shy of 2 million on a quarterly basis for several quarters. As a percentage of our overall business, e-commerce represented 35.4% of total revenue in the third quarter compared to 33.1% a year earlier. Gross margin in the third quarter was 46.2%, a 200 basis point increase over the third quarter of 2020. Changes in our sales mix, cost savings initiatives, and the impact of the lease termination of our main facility in San Diego were the primary factors driving the improvement in gross margin. R&D spending was flat with last year at $0.4 million and up by $0.2 million on a sequential basis. The increase from prior quarter is mostly related to product manufacturing for our drug development program. SG&A expense for the third quarter was $4.9 million, down $0.3 million versus the same period last year due to the impact of our lease termination benefit, partially offset by higher sales and digital marketing spend. Adjusted EBITDA loss for the third quarter was 2.7 million compared to 2.6 million in the third quarter of 2020. On a gap basis, we reported a net loss of approximately $40,000 as loss from operations, due primarily to a 2.9 million gain on debt extinguishment related to the forgiveness of our PPP loan. Reported EPS rounded to 0 cents in the third quarter compared to a loss of 3 cents in the third quarter of 2020. We continue to focus on managing our balance sheet conservatively and ended the third quarter with 1.7 million of cash and cash equivalents. We are focused on managing our working capital efficiently and improved our cash used in operations during the third quarter of 2021 to 1.6 million compared to 3 million in the second quarter of 2021. During the first nine months of 2021, we received 4.2 million in proceeds from the sale of common shares under our equity line. Our asset-light business model allows us to focus on top-line revenue growth and profitability with exciting new products such as our recently launched Reserve Collection and more products scheduled to be released soon, we continue to build solid recognition for our core brand plus CBD. Also, we continue to focus on the needs and demands of our customers. Increased customer focus coupled with continued cost efficiencies to fully leverage our business model is our path to cash flow break-even. We look forward to improve our trends in future quarters. Now I will turn the call back over to the operator for Q&A.
spk04: Thank you. At this time, we'll be conducting a question and answer session. If you'd like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. Our first question comes from Scott Fortune with Roth Capital Partners. Please proceed with your question.
spk05: Thank you for the questions and good morning. I just want to hit on the point about California, the regulatory side of things. It seems very instrumental, obviously, in adding the guidelines, improving ingestible products for other states moving forward. in light of the limited guidelines from the FDA or Congress. But can you handicap California and your exposure in California and the retailer's response as you see kind of California and moving forward into other states for CV sciences?
spk03: Sure. Good morning, Scott. Thank you for joining the call. It's a great question. So I think it's important to kind of start by trying to really understand from retailer perspectives the challenge that they faced over the last couple of years. I think there was sort of a misunderstanding from maybe the market that, gee, why can't you just take these ingestible products and put it on the shelf? they couldn't do that because many of them, many of our retail customers operate either a pharmacy or in most cases sell alcohol and so they all fall under the jurisdiction of various state agencies and if they violate a state law they can lose their ability to function as a company and so they just couldn't take the risk of being non-compliant with putting ingestible products on the shelf. So they've had two years of that type of a kind of market condition only allowed to put topicals on the shelf. And so it's taking some time to get them back into sort of the sink of having and being allowed to have ingestibles on the shelf. Having said that, though, I can tell you we're making a lot of progress and retailers in the state of California, many of which are also multi-state operators, are very excited to get ingestibles back on the shelf and we're having good success. It's really hard to say, Scott, exactly how quick of an uptake that's going to be across the state, but what I can tell you is that the retailers that don't already understand what AB45 actually does are learning quickly. Many of them were all over it and following it. But it's the relationships that we have, we're confident that we're going to be able to get ingestible products back on the shelf. That's great. And I appreciate the color there.
spk05: And then can you touch base a little bit on your product format mix. It seems you're selling more gummies or different products away from tinctures. These new formats are increasing in volume, but overall kind of dollar amount is lower and the velocity tends to be less from that standpoint. How is that, you mentioned gross margins increasing, but how is that affecting the gross margins in your product format mix going forward here?
spk03: Well, maybe, Scott, this is Joe, maybe I'll start and then I'll have Jorg jump in. I think a couple of things that we're seeing, and part of this is based on some Brightfield data, part of it's based on SPINS data, but we're seeing sort of a steady state for certain form factors and other form factors are increasing pretty dramatically. And one of the form factors that is increasing is for gummies. And As you know, as I mentioned, not only on this call, but in Q2, we launched our new Sleep and Calm gummies. And both of those products, obviously meeting key need states of our consumers, have been very, very popular. And we're seeing very good success with both of those products. And the same applies with our new Reserve Collection, just out of the gate. And it's only been a couple of weeks since we've launched these products or this collection of products. the gummy products are, in terms of unit volume, are doing better than the tinctures. They're all doing well, but the gummy format is certainly increasing, and I think that's probably true for most every brand. In terms of the mix and margin, maybe I'll let Jörg jump in.
spk01: JÖRG LANDENBORG Yeah, thank you, Joe. Scott, for the last several quarters, our gross margins have been trending in about the mid-40s. And in general, all of our new products which we have launched and which we are going to launch in the near future, we are trying to price them all with gross margins around in the mid-40s based on our current cost structure. So as SNS, so overall volume increases, our margin will improve as a result as economy of scales as we get better fixed cost absorption there. So right now we are in the mid-40s and we are planning near-term gross margins in the mid-40s, but then, like I said, as volume increases, there will be an uptick in margins. I appreciate that call.
spk05: Thanks. Yeah, you're up 200 basis points on the corner. That's great. I will jump back in the queue. Thank you.
spk04: Our next question comes from Gerald Pasquarelli with Cowan & Company. Please proceed with your question.
spk02: Hi, good morning. Thanks very much for taking the questions. I guess kind of looking at the flat sequential revenue trends, it looks like we're We're about halfway through 4Q here. Any call you can provide on how your top line's running through the, you know, first half of 4Q here? Any help there would be great. Thank you.
spk03: Yes. Good morning, Gerald. Thanks for joining the call, and thanks for the question. Yes, we are through October for sure and into the first couple weeks of November. And based so far, we expect flat to modest sequential growth in Q4. And even though we have kind of the same headwinds with competition, regulatory uncertainty, and still a COVID impact, we think the economy is opening up. And we're definitely seeing some help from brand contraction in B2B channels. As I mentioned, it's estimated going from 3,500 to 2,000 brands, and we think all of that's going to help. And so, again, we see kind of steady state, flat to modest sequential growth in Q4 with a much stronger 2022 behind that.
spk02: Got it. Yeah, that makes total sense. I would imagine that just based on the timing of AB45, probably not much in 4Q, but that should really be a 2022 benefit across the board given the distribution white space. Yes, I think that's the right way to look at it. Perfect. Just one more for me, and this is on AB45. Joe, can you offer any commentary on if this could potentially expedite entry into C-Store, given the distribution opportunity with the incremental retailers? Or is C-Store going to be more difficult to penetrate within California? I'm not sure of how the channels look out there.
spk03: So I think that AB45 helps with all California brick-and-mortar retailers, including C-Store, FDM, Specialty, and Independence. Even though the barrier to entry, especially for the larger C-Store change, is pretty significant, having to go through big distributors, it's going to help. It was just a hard stop. absent any clear regulatory framework. And this lifts that hard stop. And so now it's a matter of educating and starting back up conversations that are two years old. So it's definitely a catalyst. I think it's across all retail channels.
spk02: Got it. Makes sense. Thank you, Tim. I'll hop back into it. Awesome.
spk04: We have reached the end of the question and answer session. I'd like to turn the call back over to Joseph Donald for closing comments.
spk03: Well, I want to thank everyone for taking time this early morning to join our call. We look forward to speaking with you again soon. Thank you again. Have a great day.
spk04: This concludes today's conference. You may disconnect your lines at this time, and we thank you for your participation.
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